hello my name is Camptalcott (camp for short) and I'm a slow learner......

Ok they say that admitting you have a problem is the first step to getting help. So I'm reading my boglehead guide to retirement and I'm going through some of the videos at the "new to investing" thread suggested but.....

I'm not sure if I have this tax lost harvesting thing clear. (an entire chapter dedicated to it!! it's got to be important)

So what I think I'm reading is,

I've got a a portfolio with stocks, if it loses value I can use that amount as a deduction on my income taxes?

Without getting into all the details...at a high level, if you have a taxable account and you sell shares for less than what you paid for them (including commissions), then that realized loss can offset other income for tax purposes.

If your portfolio loses value, but you don't sell anything to actually realize a loss, then you don't get to deduct anything.

Only if you sell for a loss. In a taxable account. And don't have a wash sale.

camptalcott wrote:hello my name is Camptalcott (camp for short) and I'm a slow learner......

Ok they say that admitting you have a problem is the first step to getting help. So I'm reading my boglehead guide to retirement and I'm going through some of the videos at the "new to investing" thread suggested but.....

I'm not sure if I have this tax lost harvesting thing clear. (an entire chapter dedicated to it!! it's got to be important)

So what I think I'm reading is,

I've got a a portfolio with stocks, if it loses value I can use that amount as a deduction on my income taxes?

Not quite. In a taxable account, when you sell something, shares of a single fund or shares of a stock, you will have a gain or a loss. Gains go on your tax return as income and increase your taxes. Losses go on your tax return and can lower your income, thus reducing your taxes. Both gains and losses on funds and stocks end up on Schedule D and then on line 13 of your 1040:

The "harvesting" part means that someone may look at their taxable portfolio and say "Wow, this stock or fund has gone down a lot and I have a loss."

Then we have a split depending on the case:
"I really regret owning this in the first place, now is a good time to sell it and get out of it. The capital loss will be declared on my taxes this year and then I can invest in something completely different. If I'm investing in something that isn't obviously completely different I'd better study up on that part."
-OR-
"Though I ultimately still want to be invested in this stock or fund, right now I'm going to sell it to make the loss real (AKA "realize the loss") and claim it against my taxes this year. I'll have to park the money for 31 days in something else and here's where I better read up to make sure I have all the rules around this very clear."

Or, they may say "Though I could realize this loss and offset some taxes this year, since I believe this stock or fund will ultimately go up a bunch so I'd just be increasing my future capital gains. Since the world and future taxes are complex and unknowable, I think I'll go to a movie or a play with someone I love instead of messing around with all of this."

[edited to fix to 31 days, thanks livesoft]

Last edited by roymeo on Tue Aug 12, 2014 2:21 pm, edited 2 times in total.

The sewer system is a form of welfare state. |
-- "Libra", Don DeLillo

First it has to be a Taxable account.
As with any investment technique, there is a process to tax swapping. In order for a tax swap to occur there needs to be three steps. Step one: you must own an individual stock, bond, mutual fund, etc. Step two: you must sell that stock, bond, mutual fund, etc. Step three: you must buy a similar but not identical replacement stock, bond, mutual fund, etc. using the proceeds from the sale in step two.
Reducing your tax bill is undoubtedly the most common purpose to do a tax swap. For a taxable portfolio these losses can be turned into a valuable asset for the investor. Realized losses can be used in a couple of ways that can save the taxable investor some money during tax time. First, realized losses can be used to offset realized capital gains from other investments during the year. Second, they can be carried forward to offset future realized capital gains. Last and certainly not least, realized losses can be used to reduce ordinary income in current and future tax years.

You need to "realize" the loss, that is, actually sell the losing position.

The loss can offset two things: Income, up to $3000 and capital gains (as much as you want, up to the amount of the loss).

You get to remember whatever was not used in one year and carry it over to following years until it runs out. Each year's tax form tells you how much is left over.

Long term and short term capital losses are accounted for separately. Short offsets short and long offsets long.

This can come in very handy during a market crash. Sell everything and use the proceeds to buy similar (but not identical) positions. For example, sell Total Stock Market and buy S&P 500 or vice versa. No 31-day waiting period.

During the 2008-2009 market crash I sold everything in my parent's account (mostly crazy stuff their financial advisor had them in) and bought my own selections. That was just a coincidence since I had no idea I was tax loss harvesting. I just started to realize that their portfolio was pure nonsense. None the less, from then on my parents got a $3000 per year income deduction and never had to worry about capital gains even as they sold off positions to meet their expenses. This lasted them a number of years until their eventual passing.

Listen very carefully. I shall say this only once. (There! I've said it.)

It was my understanding that only 3k of loss can be used per tax year. So in a bad year if you sell at a 30k loss, you have 10 years of 3k loss per the next 10 year's tax returns.

Bertilak, you wrote "The loss can offset two things: Income, up to $3000 and capital gains (as much as you want, up to the amount of the loss)."

Does that mean a "loss" can offset a capital gain of any amount ? or is it limited to 3k/year?

If it can offset capital gains of any loss, I would want to more aggressively get larger "losses" on my account when possible to offset future capital gains sales.

I thought it was limited to 3k loss per tax year max that would be counted against income, and it could be carried forward indefinitely, til used up. I had not heard a different rule for offsetting capital gains.

realized capital losses can offset capitals of any amount. If you realize $1MM in losses and have 900K in realized gains, the loss offsets the entire 900K capital gain to give you a net capital loss of -100K. Use 3K to reduce ordinary income and -97K loss carries forward to next tax year.

Next year, you realize 90K in gains which is offset by loss carryovers giving a net capital loss of -7K. Use 3K to reduce ordinary income and -4K capital loss carries over to next tax year.

perhaps looking at Sch D might help. http://www.irs.gov/pub/irs-pdf/f1040sd.pdf
The form is more complex than it used to be but the idea is the same. Part I reports short term gains/losses . Lines 1-3 report current yr gains/losses.
Line 6 is the short term loss carryover from the previous yr. The short term lines are combined on line 7. There is no limitation on how much of the
short term loss carryover can be used when combining with short term gains at this point.

Part II is similar for long term gains/losses.

Part III combines the net short term gains/losses with the net long term gains/losses. If this overall net is a loss on line 16, you go to line 21 where
there is the 3K limitation on the amount of the loss you can use against ordinary income each yr.

tomd37 wrote:
"Step three: you must buy a similar but not identical replacement stock, bond, mutual fund, etc. using the proceeds from the sale in step two."

No, you don't have to buy anything if you don't want to, but if you do buy a security or fund it must be "substantially different" than what you sold for a loss. The IRS doesn't say what "substantially" means but it is accepted that S&P 500 swapped for Total Stock Market will not raise red flags. (500 stocks vs. 3,000+ stocks.)

camptalcott wrote:
I'm not sure if I have this tax lost harvesting thing clear. (an entire chapter dedicated to it!! it's got to be important)

Although Tax Loss Harvesting (TLH) can be somewhat helpful, it is NOT that important in the greater scheme of things. You posted in another post that you and your friends, all recent widows suddenly faced with responsibility for making investment decisions alone (as I am as well), are understandably a bit daunted by all the overwhelming number of things there are to learn about investing.

I'd put TLH well down your priority list. A lot of smart people think the advantages of TLH are often overblown. Yes, back in the crash of 2008, there were some big easy opportunities for major TLH tax savings, but in calmer times, the amounts can be relatively small and hardly worth the trouble of constant monitoring and jumping on opportunities. And many times, all an investor is doing is kicking the tax bill down road, possibly even to a time when s/he may be in a higher tax bracket!

See for example this piece by Jason Zweig in the Wall Street Journal, which puts TLH into proper perspective.

On a the larger point, I think it is really important to keep the boglehead concept of the majesty of simplicity in mind, especially at the outset of your taking over this daunting job of investment. Along those lines, I found the summary of truly important big points highlighted in this short blog post really helpful.

If you try to keep track of too many things at this stage, you can easily be overwhelmed by a blizzard of small details. Focus instead on a few key big ideas and you will be less likely to lose your way in the blizzard. At least that is what is working for me.